5/23/18

Guaranty and
Suretyship
April 21, 2018

Ong vs. PCIB

u Spouses Ong guaranteed the debts of BCM (their company)

u Subsequently, BCM filed a Petition for Rehabilitation and Suspension of
Payments with the SEC
u SEC granted the petition and approved the MOA that BCM entered into with its
creditors
u Spouses argued that they are also relieved from the obligations with the
granting of the suspension as they are mere guarantors
u CA disagreed and found the spouses liable for the unpaid debts of BCMs as
sureties

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Ong vs. PCIB

ISSUE:
u WON the contract is a contract of guaranty or a suretyship

HELD:
The contract is a suretyship.

Int’l Finance Corp. vs. Imperial

Textile Mills (2005)
FACTS:
u IFC and Phil. Polyamide International Corp. (PPIC) entered into a loan
agreement
u A Guarantee Agreement was executed with x x x Imperial Textile Mills, Inc.
(ITM), Grand Textile Manufacturing Corporation (Grandtex) and IFC as parties
thereto. ITM and Grandtex agreed to guarantee PPICs obligations under the
loan agreement.
u Due to unpaid debts, IFC filed a complaint against PPIC, Grandtex and ITM
before the RTC
u RTC dismissed complaint against ITM because ITM is a mere guarantor but
CA reversed RTC finding that ITM was not relieved of its obligations as
guarantor

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Int’l Finance Corp. vs. Imperial

Textile Mills (2005)
ISSUE:
u WON ITM and GrandTex are sureties.
HELD:
u ITM was a surety not merely a guarantor.

RATIO:
The terms of a contract govern the rights and obligations of the contracting parties.
When the obligor undertakes to be jointly and severally liable, it means that the
obligation is solidary. If solidary liability was instituted to guarantee a principal
obligation, the law deems the contract to be one of suretyship.

Int’l Finance Corp. vs. Imperial

Textile Mills (2005)
AS APPLIED TO THE FACTS:
“(A) By an Agreement of even date herewith between IFC and PHILIPPINE POLYAMIDE
INDUSTRIAL CORPORATION (herein called the Company), which agreement is herein called the
Loan Agreement, IFC agrees to extend to the Company a loan (herein called the Loan) of seven
million dollars ($7,000,000) on the terms therein set forth, including a provision that all or part of the
Loan may be disbursed in a currency other than dollars, but only on condition that the Guarantors
agree to guarantee the obligations of the Company in respect of the Loan as hereinafter provided.
(B) The Guarantors, in order to induce IFC to enter into the Loan Agreement, and in consideration
of IFC entering into said Agreement, have agreed so to guarantee such obligations of the Company.
Section 2.01. The Guarantors jointly and severally, irrevocably, absolutely and unconditionally
guarantee, as primary obligors and not as sureties merely, the due and punctual payment of the
principal of, and interest and commitment charge on, the Loan, and the principal of, and interest on,
the Notes, whether at stated maturity or upon prematuring, all as set forth in the Loan Agreement
and in the Notes.”

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Int’l Finance Corp. vs. Imperial

Textile Mills (2005)
NOTE:
“The use of the word guarantee does not ipso facto make the contract one of
guaranty. This Court has recognized that the word is frequently employed in
business transactions to describe the intention to be bound by a primary or an
independent obligation. The very terms of a contract govern the obligations of the
parties or the extent of the obligors liability. Thus, this Court has ruled in favor of
suretyship, even though contracts were denominated as a Guarantors Undertaking
or a Continuing Guaranty.”

JUDGMENT modified. ITM is ordered to pay.

E. Zobel, Inc. vs. Court of

Appeals (1998)
u Spouses Claveria borrowed P2.875M from SOLIDBANK to finance the
purchase of maritime barges and tugboat. The loan was granted subject to the
execution of 3 chattel mortgages and a continuing guaranty to be executed by
E. Zobel, Inc.
u Spouses defaulted. SOLIDBANK filed a complaint for sum of money with writ of
P.A. against the spouses and impleaded E. Zobel, Inc.
u E. Zobel, Inc. moved to dismiss the complaint on the ground that that
SOLIDBANK failed to register the chattel mortgage.
u RTC denied the motion to dismiss and found E. Zobel, Inc. to be a surety not a
guarantor. E. Zobel filed a petition with CA alleging GAOD. CA dismissed the
petition and agreed with the RTC.

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E. Zobel, Inc. vs. Court of

Appeals (1998)
ISSUE: WON the contract of Continuing Guaranty is a guaranty or a surety
agreement.

HELD: The contract was a surety agreement.

RATIO:
A contract of surety is an accessory promise by which a person binds himself for
another already bound, and agrees with the creditor to satisfy the obligation if the
debtor does not. A contract of guaranty, on the other hand, is a collateral
undertaking to pay the debt of another in case the latter does not pay the debt.

E. Zobel, Inc. vs. Court of

Appeals (1998)
u A contract of surety is an accessory promise by which a person binds himself for another already
bound, and agrees with the creditor to satisfy the obligation if the debtor does not.[7] A contract of
guaranty, on the other hand, is a collateral undertaking to pay the debt of another in case the latter
does not pay the debt.[8]
u Strictly speaking, guaranty and surety are nearly related, and many of the principles are common to
both. However, under our civil law,they may be distinguished thus: A surety is usually bound with his
principal by the same instrument, executed at the same time, and on the same consideration. He is an
original promissor and debtor from the beginning, and is held, ordinarily, to know every default of his
principal. Usually, he will not be discharged, either by the mere indulgence of the creditor to the
principal, or by want of notice of the default of the principal, no matter how much he may be injured
thereby. On the other hand, the contract of guaranty is the guarantor's own separate undertaking, in
which the principal does not join. It is usually entered into before or after that of the principal, and is
often supported on a separate consideration from that supporting the contract of the principal. The
original contract of his principal is not his contract, and he is not bound to take notice of its non-
performance. He is often discharged by the mere indulgence of the creditor to the principal, and is
usually not liable unless notified of the default of the principal.[9]
u Simply put, a surety is distinguished from a guaranty in that a guarantor is the insurer of the solvency
of the debtor and thus binds himself to pay if the principal is unable to pay while a surety is the insurer
of the debt, and he obligates himself to pay if the principal does not pay.

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E. Zobel, Inc. vs. Court of

Appeals (1998)
AS APPLIED TO THE FACTS:

Astro Electronics Corp., Peter Roxas

v. Phil. Export and Foreign Loan
Guarantee Corporation (2003)
FACTS:
u Astro borrowed money from Philtrust Bank evidenced by 3 promissory notes
signed twice by Astro President P. Roxas and in his personal capacity. Roxas
also executed a continuing surety agreement in favor of Philtrust.
Philguarantee agreed to guarantee 70% of the loan provided that upon
payment it will be subrogated to the rights of Philtrust vs. Astro.
u Because Astro failed to pay its loans, Philguarantee paid the 70% and
thereafter filed a complaint for sum of money against Astro and Roxas.
u Roxas claimed he signed the PNs in blank and the phrases “in his personal
capacity” and “in his official capacity” were inserted without his knowledge.
u RTC found Roxas liable which the CA also affirmed.

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Astro Electronics Corp., Peter Roxas

v. Phil. Export and Foreign Loan
Guarantee Corporation (2003)
ISSUE:
WON Peter Roxas is jointly and severally (solidarily) liable with Astro for the sum
awarded by the RTC.
HELD:
Yes, Roxas is liable in his capacity as surety to the agreement.
RATIO:
An instrument which begins with I, We, or Either of us promise to pay, when signed
by two or more persons, makes them solidarily liable.[13] Also, the phrase joint and
several binds the makers jointly and individually to the payee so that all may be
sued together for its enforcement, or the creditor may select one or more as the
object of the suit.

Astro Electronics Corp., Peter Roxas

v. Phil. Export and Foreign Loan
Guarantee Corporation (2003)
AS APPLIED TO THE FACTS:
“FOR VALUE RECEIVED, I/We jointly, severally and solidarily, promise to pay to PHILTRUST BANK or order...”

Having signed under such terms, Roxas assumed the solidary liability of a debtor and Philtrust Bank may choose
to enforce the notes against him alone or jointly with Astro.
Subrogation is the transfer of all the rights of the creditor to a third person, who substitutes him in all his rights.[19] It
may either be legal or conventional. Legal subrogation is that which takes place without agreement but by
operation of law because of certain acts.[20] Instances of legal subrogation are those provided in Article 1302 of the
Civil Code. Conventional subrogation, on the other hand, is that which takes place by agreement of the parties.[21]
Roxas acquiescence is not necessary for subrogation to take place because the instant case is one of the legal
subrogation that occurs by operation of law, and without need of the debtors knowledge.[22] Further, Philguarantee,
as guarantor, became the transferee of all the rights of Philtrust as against Roxas and Astro because the guarantor
who pays is subrogated by virtue thereof to all the rights which the creditor had against the debtor.
JUDGMENT:
CA affirmed.

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Spouses Toh vs. Solidbank (2003)

FACTS
u SOLIDBANK extended a credit line facility of about P10M to First Business
Paper Corp. (FBPC) with the terms and conditions stated in the letter-advise
u Among the documents required for the credit line was the Continuing Guaranty
for any and all amounts signed by petitioner-spouses Luis Toh and Vicky Tan
Toh, and respondent-spouses Kenneth and Ma. Victoria Ng Li.
u The spouses Luis Toh and Vicky Tan Toh were then Chairman of the Board and Vice-
President, respectively, of FBPC, while respondent-spouses Kenneth Ng Li and Ma.
Victoria Ng Li were President and General Manager, respectively, of the same
corporation.
u FBPC availed of 13 letters of credit and loans totaling P15,227,510.00 with
Kenneth Ng Li, Ma. Victoria Ng Li and Redentor Padilla as signatories over a
series of trust receipts

Toh vs. Solidbank (2003)

u Bank received information that spouses KNL and MVNL had fraudulently left
their home. Bank then filed a collection case against the spouses To, FBPC but
not upon KNLI and MVNL who had absconded.
u Spouses alleged that while they were part of FPBC, they had already divested
their shares as early as March when the surety was executed in May 1993.
u RTC ruled in favor of the Bank but absolved the spouses Toh of their liability
finding that they executed the C.G. while they were still part of the corp.
u CA ruled that the spouses should still be solidarily liable with FBCP since their
participation was not contingent on their positions in the corporation.

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Toh vs. Solidbank (2003)

ABOUT THE CONTINUING GUARANTY:

u Signed more than 30 days after the letter-advise
u The terms of the instrument defined the contract arising therefrom as a surety agreement and provided
for the solidary liability of the signatories thereto for and in consideration of loans or advances and
credit in any other manner to, or at the request or for the account of FBPC.
u No maximum limit on the indebtedness that respondent FBPC may incur and for which the sureties
may be liable, stating that the credit facility covers any and all existing indebtedness of, and such other
loans and credit facilities which may hereafter be granted to FIRST BUSINESS PAPER
CORPORATION.
u Contained a de facto acceleration clause if default be made in the payment of any of the instruments,
indebtedness, or other obligation guaranteed by petitioners and respondents. So as to strengthen this
security, the Continuing Guaranty waived rights of the sureties against delay or absence of notice or
demand on the part of respondent Bank, and gave future consent to the Banks action to extend or
change the time payment, and/or the manner, place or terms of payment, including renewal, of the
credit facility or any part thereof in such manner and upon such terms as the Bank may deem proper
without notice to or further assent from the sureties.
u The effectivity of the Continuing Guaranty was not contingent upon any event or cause other than the
written revocation thereof with notice to the Bank that may be executed by the sureties.

Toh vs. Solidbank (2003)

ISSUE:
WON the spouses should be held liable
HELD:
Yes. However, there are other reasons why they are discharged.
RATIO:
Any doubt in the terms and conditions of the surety agreement should be resolved
in favor of the surety. (PNB vs. CA)

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Toh vs. Solidbank (2003)

AS APPLIED TO THE FACTS:

u While the spouses are liable, the Bank violated the terms of its own letter-advise by
making unauthorized extensions – ex. Requiring a marginal deposit of at least 15%
and partial payment of 25% before granting an extension.
u The Court also noted the suspicious circumstances that militate against the
enforcement of the Continuing Guaranty.
u As has been said, if the suretyship contract was made upon the condition that the
principal shall furnish the creditor additional security, and the security being
furnished under these conditions is afterwards released by the creditor, the surety is
wholly discharged, without regard to the value of the securities released, for such a
transaction amounts to an alteration of the main contract.
JUDGMENT:

Petition granted. CA decision reversed and set aside. Souses are discharged

Filipinas Textile Mills vs. Court of

Appeals (2003)
FACTS
u Filtex applied for domestic letters of credit from State Investment House Inc.
(SIHI) to finance its purchases from Polyamide and Indophil and Texfiber
u SIHI issued the letters of credit in part due to the Comprehensive Surety
agreement – a continuing surety agreement, executed by Bernardino
Villanueva where he guaranteed, jointly and severally with Filtex, the full and
punctual payment at maturity to SIHI of all the indebtedness of Filtex
u Filtex issued sight drafts and trust receipts to SIHI
u Filtex eventually defaulted
u RTC ruled in favor of SIHI and ordered Filtex and Villanueva to pay; CA
affirmed the RTC but on MR reduced the amount of unpaid balance

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Filipinas Textile Mills vs. Court of

Appeals (2003)
ISSUE:
1. WON there was no consent from the debtor (Filtex)and creditor (SIHI) to the surety agreement.
2. WON the comprehensive surety agreement was materially altered by the extension of time granted to Filtex, thereby releasing him
from liability.

RATIO:
u Parties are bound by their admissions in their pleadings.
u The neglect of the creditor to sue the principal at the time the debt falls due does not discharge the surety, even if such delay
continues until the principal becomes insolvent The raison detre for the rule is that there is nothing to prevent the creditor from
proceeding against the principal at any time. At any rate, if the surety is dissatisfied with the degree of activity displayed by the
creditor in the pursuit of his principal, he may pay the debt himself and become subrogated to all the rights and remedies of the
creditor.
u It may not be amiss to add that leniency shown to a debtor in default, by delay permitted by the creditor without change in the time
when the debt might be demanded, does not constitute an extension of the time of payment, which would release the surety. In
order to constitute an extension discharging the surety, it should appear that the extension was for a definite period, pursuant to an
enforceable agreement between the principal and the creditor, and that it was made without the consent of the surety or with a
reservation of rights with respect to him. The contract must be one which precludes the creditor from, or at least hinders him in,
enforcing the principal contract within the period during which he could otherwise have enforced it, and precludes the surety from
paying the debt

Filipinas Textile Mills vs. Court of

Appeals (2003)
AS APPLIED TO THE FACTS:
1. It is clear that both the debtor and creditor consented to the surety (Question: is
It necessary?).
2. The Court simply said the extension did not operate to discharge Villanueva from
his duties as surety.

JUDGMENT:
Petition is denied and CA decision is affirmed.

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Severino vs Echaus (1931)

FACTS:
u Echaus is the guarantor of the obligation of Guillermo Severino (P100,000),
pursuant to a compromise agreement with the plaintiff and relatives of the
deceased Melecio Severino.
u Part of the money is deposited subject to finality of the status of Fabiola
Severino as the natural child of the deceased.
u Echaus claims that he did not benefit from agreeing to be guarantor and hence
should not be liable for the obligation.
ISSUE:
WON there was lack of consideration on the part of the guarantor.
HELD: No.

Severino vs Echaus (1931)

FACTS:
u Echaus is the guarantor of the obligation of Guillermo Severino (P100,000),
pursuant to a compromise agreement with the plaintiff and relatives of the
deceased Melecio Severino.
u Part of the money is deposited subject to finality of the status of Fabiola
Severino as the natural child of the deceased.
u Echaus claims that he did not benefit from agreeing to be guarantor and hence
should not be liable for the obligation.
ISSUE:
WON there was lack of consideration on the part of the guarantor.
HELD: No.

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Severino vs Echaus (1931)

RATIO:
u A guarantor or surety is bound by the same consideration that makes the contract effective
between the principal parties thereto. (Pyle vs. Johnson, 9 Phil., 249.)
AS APPLIED TO THE FACTS:
u The compromise and dismissal of a lawsuit is recognized in law as a valuable consideration;
and the dismissal of the action which Felicitas Villanueva and Fabiola Severino had instituted
against Guillermo Severino was an adequate consideration to support the promise on the part
of Guillermo Severino to pay the sum of money stipulated in the contract which is the subject of
this action. The promise of the appellant Echaus as guarantor therefore binding. It is never
necessary that the guarantor or surety should receive any part of the benefit, if such there be,
accruing to his principal. But the true consideration of this contract was the detriment suffered
by the plaintiffs in the former action in dismissing that proceeding, and it is immaterial that no
benefit may have accrued either to the principal or his guarantor.
JUDGMENT:
CFI affirmed.

Willex Plastic Industries Corp. vs

CA (1998)
FACTS:
u Manila Bank issued letters of credit in favor of Inter-Resin Industrial Corp (IRIC) and IUCP (Investment and
Underwriting Corp. of the Phil) secured by a Continuing Surety Agreement executed by Inter-Resin and IUCP
u Willex and IUCP executed a Continuing Guaranty in favor of IUCP for and inconsideration of the sums
obtained/to be obtained
u Upon demand by Manilabank, IUCP paid the obligations of Inter-Resin.
u iUCP was eventually succeeded by Atrium.
u Atrium then filed a case against Willex and Inter-Resin to recover IUCP’s payment to Manilabank before the
RTC.
u Inter-Resin paid Atrium’s successor, Interank, the proceeds from its fire insurance policy.
u Interbank won at the RTC which was affirmed by the CA.
ISSUES:
1. WON Willex may be held solidarily liable with IRIC for the amount paid to Metrobank.
2. WON a guaranty, an accessory contract, cannot exist in the absence of a valid principal obligation.
3. WON a continuing guaranty can be retroactively applied.

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Willex Plastic Industries Corp. vs

CA (1998)
HELD:
1. YES, Willex may be held solidarily liable with IRIC for the amount paid to
Metrobank.
2. YES, the consideration for the principal obligation need not pass directly to the
surety.
3. YES.
RATIO:
1. Facts show the intention of Willex to indemnify IUCP(Atrium).
2. The consideration necessary to support a surety obligation need not pass directly to
the surety, a consideration moving to the principal alone being sufficient.
3. As a rule, continuing suretyship is prospective and not retroactive, the intention of
the parties and evidence is controlling.

Willex Plastic Industries Corp. vs

CA (1998)
AS APPLIED TO THE FACTS:
1. The continuing guaranty is actually a surety because the stipulation expressly
renounces the right of excussion:
“If default be made in the payment of the NOTE/s herein guaranteed you and/or your
principal/s may directly proceed against Me/Us without first proceeding against and
exhausting DEBTOR/s properties in the same manner as if all such liabilities constituted
My/Our direct and primary obligations. (italics supplied)”
2. Willex’s contention is based on the fact that it is not a party either to the Continuing
Surety Agreement or to the loan agreement between Manilabank and Inter-Resin
Industrial. However, It is never necessary that a guarantor or surety should receive any
part or benefit, if such there be, accruing to his principal
3. The parties to the Continuing Guaranty clearly provided that the guaranty would
cover sums obtained and/or to be obtained by Inter-Resin Industrial from Interbank.
JUDGMENT: CA decision affirmed.

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Diño vs. CA (1992)

FACTS:
u Uy Tiam Enterprises and Freight Services (UTEFS) through Uy Tiam applied for credit
accommodations with Metrobank in 1977.
u Diño and Uy executed a Continuing Surety to guarantee the obligation, up to the amounts of P800,000
and P300,00 respectively.
u The initial obligation under the CA was paid so Uy Tiam applied again in 1979 for credit and executed a
Trust Receipt for the purpose. Diño and Uy were not privy to the second transaction.
u UTEFS was not able to comply with its obligations re: trust receipt forcing Metrobank to file a case
against the sureties.
u Metrobank filed a collection case with the RTC. RTC dismissed the complaint against Uy and Diño. On
appeal, CA reversed, holding that the CS covers continuing obligations.
ISSUE/S:
1. WON a surety may be still be held liable for a future obligation contracted after the original obligation
they guaranteed has been discharged even though they were not privy to the same.
2. If liable, the extent of the liability.

Diño vs. CA (1992)

HELD:
1. Yes.
2. Up the amount guaranteed but not beyond.
RATIO:
1. A continuing guaranty is one which covers all transactions, including those arising in the future,
which are within the description or contemplation of the contract, of guaranty, until the
expiration or termination thereof. 10 A guaranty shall be construed as continuing when by the
terms thereof it is evident that the object is to give a standing credit to the principal debtor to be
used from time to time either indefinitely or until a certain period, especially if the right to recall
the guaranty is expressly reserved. Hence, where the contract of guaranty states that the same
is to secure advances to be made "from time to time" the guaranty will be construed to be a
continuing one.
2. A guarantor may bond himself for less, but not for more than the principal debtor, both as
regards the amount and the onerous nature of the conditions.

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Diño vs. CA (1992)

AS APPLIED TO THE FACTS:

Diño vs. CA (1992)

AS APPLIED TO THE FACTS:

1. The wording of the Continuing Guaranty provides:

2. The Continuing Suretyship Agreements signed by petitioner Diño and petitioner Uy

fix the aggregate amount of their liability, at any given time, at P800,000.00 and
P300,000.00, respectively.
JUDGMENT: PETITION granted but modified to the extent of the Diño and Uy’s liability.

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Atok Finance
Corp. vs. CA
(1993)
FACTS:
u Sanyu Chemical and Sanyu Trading,
along with individual private
stockholders of Sanyu Chemical
executed a Continuing Surety
Agreement in favor of Atok Finance
as creditor.
u Sanyu Chemical later assigned its
trade receivables to Atok Finance.
Failing to collect on its receivables,
Atok Finance sued Sanyu and the
individual sureties.
u RTC ruled in favor of Atok but IAC/CA
reversed the decision.

Atok Finance vs. CA (1992)

ISSUE/S:
u WON the Continuing Surety Agreement is held null and void as having been
executed without consideration and without a pre-existing principal obligation to
sustain it.
u WON the private respondents (sureties) are liable on the Deed of Assignment.
HELD:
1. NO, the CSA is valid.
2. YES.

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Atok Finance vs. CA (1992)

RATIO:
1. The suretyship agreement itself is valid and binding even before the principal obligation intended
to be secured thereby is born. Article 2053 should not be interpreted literally. Comprehensive or
continuing surety agreements are in fact quite common place in present day financial and
commercial practice. It is clear to us that the Rizal Commercial Banking Corporation and
the NARIC cases rejected the distinction which the Court of Appeals in the case at bar sought to
make with respect to Article 2053, that is, that the "future debts" referred to in that Article relate to
"debts already existing at the time of the constitution of the agreement but the amount [of which] is
unknown," and not to debts not yet incurred and existing at that time. Of course, a surety is not
bound under any particular principal obligation until that principal obligation is born. But there is no
theoretical or doctrinal difficulty inherent in saying that the suretyship agreement itself is valid and
binding even before the principal obligation intended to be secured thereby is born, any more that
there would be in saying that obligations which are subject to a condition precedent are valid and
binding before the occurrence of the condition precedent.
2. The failure to collect on the trade receivables was a violation of the warranty of solvency by the
Assignor. By virtue of the CSA, the private respondents are still liable.

Atok Finance vs. CA (1992)

AS APPLIED TO THE FACTS:

1. Comprehensive or continuing surety agreements are in fact quite common place in present day
financial and commercial practice. A bank or a financing company which anticipates entering
into a series of credit transactions with a particular company, commonly requires the projected
principal debtor to execute a continuing surety agreement along with its sureties. By executing
such an agreement, the principal places itself in a position to enter into the projected series of
transactions with its creditor; with such surety agreement, there would be no need to execute a
separate surety contract or bond for each financing or credit accommodation extended to the
principal debtor. As we understand it, this is precisely what happened in the case at bar.
2. … And because assignor Sanyu Chemical became, under the terms of the Deed of
Assignment, solidary obligor under each of the assigned receivables, the other private
respondents (the Arrieta spouses, Pablito Bermundo and Leopoldo Halili), became solidarily
liable for that obligation of Sanyu Chemical, by virtue of the operation of the Continuing
Suretyship Agreement. Put a little differently, the obligations of individual private respondent
officers and stockholders of Sanyu Chemical under the Continuing Suretyship Agreement, were
activated by the resulting obligations of Sanyu Chemical as solidary obligor under each of the
assigned receivables by virtue of the operation of the Deed of Assignment. That solidary liability
of Sanyu Chemical is not subject to the limiting period set out in Article 1629 of the Civil Code.

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Tañedo vs. Allied Banking (2002)

FACTS:
u Alfredo Ching and Tañedo executed a continuing guaranty agreement over 7
promissory notes in favor of Allied Banking over the obligations of Cheng Ban Yek
Co. which eventually defaulted
u RTC ruled in favor of Allied Banking but CA declared Ching and Tañedo free from
any liability
u During the pendency of the case, Allied Bank in the Fourth Amendatory Agreement
extended the payment of the obligation without the consent of the surety
ISSUES:
1. WON the execution by the respondent Bank of the Fourth Amendatory Agreement
extinguished petitioner’s obligations as surety,
2. WON the "continuing guarantee" executed by the petitioner is a contract of (surety)
adhesion.

Tañedo vs. Allied Banking (2002)

HELD:
1. NO
2. NO
RATIO/AS APPLIED TO THE FACTS:
1. The "continuing guarantee" executed by the petitioner provided that he consents and agrees
that the bank may, at any time or from time to time extend or change the time of payments
and/or the manner, place or terms of payment of all such instruments, loans, advances, credits
or other obligations guaranteed by the surety. Hence, the extensions of the loans did not
release the surety.
2. Even if the "continuing guarantee" were considered as one of adhesion, we find the contract of
"surety" valid because petitioner was "free to reject it entirely".Petitioner was a stockholder and
officer of Cheng Ban Yek and Co., Inc. and it was common business and banking practice to
require "sureties" to guarantee corporate obligations.
JUDGMENT: Petition denied and CA Affirmed.

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Southern Motors vs. Barbosa

(1956)
FACTS:
u Barbosa guaranteed the debt of Alfredo Brilliantes to Southern Motors by
executing a Deed of Real Estate Mortgage which Southern Motors foreclosed
when Brillantes failed to pay his debt
u Barbosa raised the affirmative defense that SM had not exhausted the
properties of the debtor Brillantes
u CFI ruled in favor of Southern Motors
ISSUES:
1. WON the properties of the principal debtor should be exhausted first before
foreclosing the mortgage executed by the guarantor.

Southern Motors vs. Barbosa

(1956)
HELD:
1. NO.
RATIO:
u The right of guarantors, under Article 2058 of the Civil Code of the Philippines, to
demand exhaustion of the property of the principal debtor, exists only when a
pledge or a mortgage has not been given as special security for the payment of the
principal obligation. Guarantees, without any such pledge or mortgage, are
governed by Title XV of said Code, whereas pledges and mortgages fall under Title
XVI of the same Code, in which the following provisions, among others, are found.
u ART. 2087. “It is also of the essence of these contracts that when the principal obligation
becomes due, the things in which the pledge or mortgage consists may be alienated for
the payment to the creditor.”
u ART. 2126. “The mortgage directly and immediately subjects the property upon which it is
imposed, whoever the possessor may be, to the fulfillment of the obligation for whose
security it was constituted.”

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Southern Motors vs. Barbosa

(1956)
AS APPLIED TO THE FACTS:

JUDGMENT: Decision affirmed.

Baylon vs. CA (1999)

FACTS:
u Baylon signed as guarantor for a promissory note executed by Luanzon in favor of Tomacruz.
Luanzon also issued several checks. Baylon had persuaded Tomacruz that Luanzon is a
contractor and that Tomacruz could also invest in her business.
u However, Luanzon defaulted on the P/N, prompting Tomacuz to file a case against Baylon.
u RTC ruled in favor of Tomacruz and found the transaction to be a loan and not an investment.
CA affirmed RTC.
ISSUES:
1. WON the contract is a loan or an investment.
2. WON the creditor can proceed against the guarantor even though she has not yet exhausted
the property of the principal debtor.
HELD:
1. The contract is a loan.
2. No.

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Baylon vs. CA (1999)

RATIO:
1. If the terms of a contract are clear and leave no doubt as to the intention of the
contracting parties, the literal meaning of its stipulation shall control.
2. The guarantor cannot be compelled to pay the creditor unless the latter has
exhausted all the property of the debtor, and has resorted to all the legal remedies
against the debtor. It is axiomatic that the liability of the guarantor is only
subsidiary. All the properties of the principal debtor must first be exhausted before
his own is levied upon.
Thus, the creditor may hold the guarantor liable only after judgment has been
obtained against the principal debtor and the latter is unable to pay, "for obviously the
'exhaustion of the principal's property' — the benefit of which the guarantor claims —
cannot even begin to take place before judgment has been obtained." This rule is
embodied in article 2062 of the Civil Code which provides that the action brought by the
creditor must be filed against the principal debtor alone, except in some instances when
the action may be brought against both the debtor and the principal debtor.

Baylon vs. CA (1999)

AS APPLIED TO THE FACTS:

1. The wording of the PN clearly shows it was a loan and the monthly payments
interest payments.
2. Under the circumstances availing in the present case, we hold that it is premature
for this Court to even determine whether or not petitioner is liable as a guarantor
and whether she is entitled to the concomitant rights as such, like the benefit of
excussion, since the most basic prerequisite is wanting — that is, no judgment was
first obtained against the principal debtor Rosita B. Luanzon. It is useless to speak
of a guarantor when no debtor has been held liable for the obligation which is
allegedly secured by such guarantee. Although the principal debtor Luanzon was
impleaded as defendant, there is nothing in the records to show that summons was
served upon her. Thus, the trial court never even acquired jurisdiction over the
principal debtor. We hold that private respondent must first obtain a judgment
against the principal debtor before assuming to run after the alleged guarantor.
JUDGMENT: CA decision set aside.

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Wise & Co. vs. Tanglao (1936)

FACTS:
u David owed Wise & Co. money and the company sought to attach his property; hto
avoid the attachment, David got his Attorney Diosdado Tanglao to execute in his
favor a power of attorney authorizing him to sign for him as guarantor and to
mortgage his property in Pampanga to settle the civil case
u David was only able to pay part of the amount so Wise & Co. tried to recover the
rest from Tanglao
ISSUES:
1. WON the SPA executed by Tanglao made him a guarantor.
2. WON the creditor can proceed against Tanglao for the satisfaction of the debt.
HELD:
1. NO. The SPA merely authorized David to enter into a guaranty which he did not.
2. No.

Wise & Co. vs. Tanglao (1936)

RATIO/AS APPLIED TO THE FACTS:

1. While the SPA authorized David to sign as guarantor, he only executed a
mortgage and nothing in the SPA suggests he became a guarantor.
2. Assuming that he is a guarantor, the property of the principal debtor must first
be exhausted.
JUDGMENT: Decision reversed.

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Vda. De Syquia vs. Jacinto, et al.

(1934)
FACTS:
u BPI sued Felipe Jacinto, Perfecto Jacinto and Rafael Palma on a promissory note they executed in
favor of BPI;
u BPI eventually endorsed the P/N to Gregorio Syquia who sought to collect on the remaining balance
and revive the judgment;
u The Jacintos claimed that BPI already executed the decision and acquired the properties of the
Jacintos;
u The Court then deducted the amount of the properties sold and adjudged payment on the balance;
u On appeal, Palma raised the defense that the judgment on the principal debtors has not yet been
satisifed
ISSUES:
1. WON the revived judgment applies to Palma as guarantor.
HELD:
1. NO. The suit is still premature.

Vda. De Syquia vs. Jacinto, et al.

(1934)
RATIO:
u Merely including or impleading the guarantor in the suit is not the demand contemplated by law.
u That demand can be made only after judgment on the debt, for obviously the "exhaustion of the
principal's property" — the benefit of which the guarantor claims — cannot even begin to take place
before judgment has been obtained. Only then can the creditor "levy upon the property of the principal"
— only then can the liability of the creditor begin under article 1833 of the Civil Code. It would be
absurd and futile to point out "saleable property of the debtor" at the inception of the suit, when it
cannot be seized or sold, and require the creditor to make a "levy" upon it.

AS APPLIED TO THE FACTS:

u Palma was not included in the original action
u No proof that the property of the principal creditors has been exhausted
u Action and defenses raised by the guarantor still premature
JUDGMENT:
Decision modified; Palma as guarantor may be held contingently liable.

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Arroyo vs. Jungsay (1916)

FACTS:
u Plaintiff Arroyo, present guardian of Tito Jocsing, filed a suit against Jungsay, former guardian
for absconding with his ward’s property which had by then ended up in the hands of third party
purchasers
u On appeal the ex-guardians claim that from the judgment award of P6000, P4400 should be
deducted as the value of the attached property of the guardian (in the hands of 3rd parties) and
raised the defense that excussion should be applied
ISSUES:
1. WON the benefit of excussion applies to the sureties.
2. WON the property attached should be deemed compliance.

HELD:
1. NO.
2. NO.

Arroyo vs. Jungsay (1916)

RATIO:
1. before the surety is entitled to the benefit of excussion, he must point out to the
creditor property of the principal debtor which can be sold and which is sufficient to
cover the amount of the debt.
AS APPLIED TO THE FACTS:
1. The property pointed out by the sureties is not sufficient to pay the indebtedness; it
is not salable; it is so incumbered that third parties have, as we have indicated, full
possession under claim of ownership without leaving to the absconding guardian a
fractional or reversionary interest without determining first whether the claim of one
or more of the occupants is well founded. In all these respects the sureties have
failed to meet the requirements of article 1832 of the Civil Code.
JUDGMENT:
Decision appealed from affirmed.

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Luzon Steel vs. Sia (1969)

FACTS:
u Luzon Steel sued Metal Manufacturing and Jose Sia its former manager for breach of contract and damages
u Luzon Steel obtained a writ of preliminary attachment on the properties but did not execute because Sia executed a counterbond
with Times Surety & Insurance Co. as surety
u Plaintiff and Sia later entered into a compromise agreement (without surety participating)
u When Sia failed to comply, plaintiff obtained a writ of execution against Sia and the counterbond
u Surety moved to quash the writ of execution which the CFI then granted and cancelled the counterbond, hence the appeal
ISSUES:
1. WON the judgment on the compromise discharged the surety from its obligation under the attachment counterbond.
2. WON the writ of execution could be issued against the surety without previous exhaustion of the debtor’s properties.

HELD:
1. NO.
2. YES.

Luzon Steel vs. Sia (1969)

RATIO:

1. Distinction must be made between counterbonds to obtain the lifting of a writ of attachment which makes these bonds security for the payment of any judgment
that the attaching party may obtain and are mere replacements of the property formerly attached. The lower court and the appellee herein appear to have relied
on doctrines of this Court concerning the liability of sureties in bonds filed by a plaintiff for the issuance of writs of attachment, without discriminating between
such bonds and those filed by a defendant for the lifting of writs of attachment already issued and levied. the liability of the sureties was fixed and conditioned
on the finality of the judgment rendered regardless of whether the decision was based on the consent of the parties or on the merits. A judgment entered on a
stipulation is nonetheless a judgment of the court because consented to by the parties. (Mercado vs. Macapayag)

AS APPLIED TO THE FACTS:

1. The surety's contention is untenable. The counterbond contemplated in the rule is evidently an ordinary guaranty where the sureties assume a subsidiary
liability. This is not the case here, because the surety in the present case bound itself "jointly and severally" (in solidum) with the defendant; and it is prescribed
in Article 2059, paragraph 2, of the Civil Code of the Philippines that excusion (previous exhaustion of the property of the debtor) shall not take place "if he (the
guarantor) has bound himself solidarily with the debtor". The rule heretofore quoted cannot be construed as requiring that an execution against the debtor be
first returned unsatisfied even if the bond were a solidary one; for a procedural rule may not amend the substantive law expressed in the Civil Code, and further
would nullify the express stipulation of the parties that the surety's obligation should be solidary with that of the defendant.

2. A second reason against the stand of the surety and of the court below is that even if the surety's undertaking were not solidary with that of the principal debtor,
still he may not demand exhaustion of the property of the latter, unless he can point out sufficient leviable property of the debtor within Philippine territory. The
surety's contention is untenable. The counterbond contemplated in the rule is evidently an ordinary guaranty where the sureties assume a subsidiary liability.
This is not the case here, because the surety in the present case bound itself "jointly and severally" (in solidum) with the defendant; and it is prescribed in
Article 2059, paragraph 2, of the Civil Code of the Philippines that excusion (previous exhaustion of the property of the debtor) shall not take place "if he (the
guarantor) has bound himself solidarily with the debtor". The rule heretofore quoted cannot be construed as requiring that an execution against the debtor be
first returned unsatisfied even if the bond were a solidary one; for a procedural rule may not amend the substantive law expressed in the Civil Code, and further
would nullify the express stipulation of the parties that the surety's obligation should be solidary with that of the defendant.

JUDGMENT: Decision reversed.

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Towers Assurance Corp. vs.

Ororama Supermart (1977)
FACTS:
u See Hong, the proprietor of Ororama Supermart in Cagayan de Oro City, sued the spouses
Ernesto Ong and Conching Ong for collection and sought preliminary attachment of their
property which was then attached
u The spouses filed a counterbond to lift the attachment with Towers Assurance assuming
solidary liability
u Eventually the supermarket filed for execution and the trial court issued the writ; Ong did not
appeal but Towers Assurance did

ISSUES:
1. WON the lower court acted with GAOD in issuing the writ of execution

HELD:
1. YES.

Towers Assurance Corp. vs.

Ororama Supermart (1977)
RATIO:
u Under Sec. 17 of the then Rules, in order that the judgment creditor might recover from the surety on the counterbond, it is
necessary (1) that execution be first issued against the principal debtor and that such execution was returned unsatisfied in whole
or in part; (2) that the creditor made a demand upon the surety for the satisfaction of the judgment, and (3) that the surety be given
notice and a summary hearing in the same action as to his liability for the judgment under his counterbond.

AS APPLIED TO THE FACTS:

u The first requisite mentioned above is not applicable to this case because Towers Assurance Corporation assumed a solidary
liability for the satisfaction of the judgment. A surety is not entitled to the exhaustion of the properties of the principal debtor (Art.
2959, Civil Code; Luzon Steel Corporation v. Sia, L-26449, May 15, 1969, 28 SCRA 58, 63).
u But certainly, the surety is entitled to be, heard before an execution can be issued against him since he is not a party in the case
involving his principal. Notice and hearing constitute the essence of procedural due process. (Martinez v. Villacete, 116 Phil. 326;
Alliance Insurance & Surety Co., Inc. v. Hon. Piccio, 105 Phil. 1192, 1200; Luzon Surety Co., Inc. v. Beson, L-26865-66, January
30, 1970, 31 SCRA 313)chanr

JUDGMENT:
Writ of execution set aside. Lower court ordered to conduct summary hearing

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Cochingyan vs. R&B Surety

(1987)
FACTS:
u Pacific Agri Suppliers applied for and was granted an increase in its credit line with PNB, secured by a Surety Bond issued by R&B Surety
u In consideration of the Surety bonds, 2 indemnity agreements were entered into by Cochingyan and Catholic Church Market and one by
PAGRICO
u When PAGRICO failed, R&B paid and then tried to recover the payments from Cochingyan, et al. in the CFI
u CFI and Appellate court ruled in favor of R&B

ISSUES:
1. WON the Trust Agreement between PNB (thru Tomas Besa), the Cochingyan spouses through Catholic Church Mart (Trustor) and PNB (as
beneficiary) & novated the contract thereby releasing the individuals from their obligation under the indemnity agreements.
2. WON the extension of payment granted under the Trust Agreement extinguished the obligations.

HELD:
1. NO.
2. NO.

Cochingyan vs. R&B Surety

(1987)
RATIO:
u Novation is the extinguishment of an obligation by the substitution or change of the obligation by a subsequent
one which terminates it, either by changing its object or principal conditions, or by substituting a new debtor in
place of the old one, or by subrogating a third person to the rights of the creditor. 4 Novation through a change
of the object or principal conditions of an existing obligation is referred to as objective (or real) novation.
Novation by the change of either the person of the debtor or of the creditor is described as subjective (or
personal) novation. Novation may also be both objective and subjective (mixed) at the same time. In both
objective and subjective novation, a dual purpose is achieved-an obligation is extinguished and a new one is
created in lieu thereof.5
u If objective novation is to take place, it is imperative that the new obligation expressly declare that the old
obligation is thereby extinguished, or that the new obligation be on every point incompatible with the old
one. 6 Novation is never presumed: it must be established either by the discharge of the old debt by the
express terms of the new agreement, or by the acts of the parties whose intention to dissolve the old
obligation as a consideration of the emergence of the new one must be clearly discernible. 7
u Again, if subjective novation by a change in the person of the debtor is to occur, it is not enough that the
juridical relation between the parties to the original contract is extended to a third person. It is essential that
the old debtor be released from the obligation, and the third person or new debtor take his place in the new
relation. If the old debtor is not released, no novation occurs and the third person who has assumed the
obligation of the debtor becomes merely a co-debtor or surety or a co-surety. 8

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Cochingyan vs. R&B Surety

(1987)
AS APPLIED TO THE FACTS:
1. There was no novation.
2. The Agreement was clear that the obligations of the surety are not discharged by
the payment of the principal obligation.

Mercantile Insurance Co. vs.

Felipe Ysmael (1989)
FACTS:
u Felipe Ysmal Jr. & Co. applied for a credit line with PNB; Felipe Ysmael entered into
two surety agreements for this purpose
u Felipe Ysmael then entered into an Indemnity Agreement with Mercantile Insurance
together with Magdalena Estate where he was president
u For failure to pay, PNB filed a case against Felipe Ysmael et al.
u RTC and CA ruled against the defendants
ISSUE;
WON the Surety can demand indemnification from the principal, upon the latter's
default, even before the former has paid to the creditor, has long been settled by this
Court in the affirmative.
HELD: YES

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Mercantile Insurance Co. vs.

Felipe Ysmael (1989)
FACTS:
u Felipe Ysmal Jr. & Co. applied for a credit line with PNB; Felipe Ysmael entered into
two surety agreements for this purpose
u Felipe Ysmael then entered into an Indemnity Agreement with Mercantile Insurance
together with Magdalena Estate where he was president
u For failure to pay, PNB filed a case against Felipe Ysmael et al.
u RTC and CA ruled against the defendants
ISSUE;
WON the Surety can demand indemnification from the principal, upon the latter's
default, even before the former has paid to the creditor, has long been settled by this
Court in the affirmative.
HELD: YES

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